Strategic Analysis of Aviation Industry

Comparative Analysis of Indigo and

Singapore Airlines&

Air Asia Alliance

Aviation Industry – Global Scenario

o THE GLOBAL AIRLINE INDUSTRY Consists of over 2000 airlines Operating more than 23,000 aircraft Providing service to over 3700 airports Average Growth Rate of 5% in last 30 years Contributes around 8 % in the world GDP

o MAJOR INDUSTRY PLAYERS Delta Airlines , United Airlines, Southwest

Airlines, American Airlines– USA Lufthansa – Germany Southern Airlines - China

o MAJOR AIRCRAFT MANUFACTURERS Air Bus Boeing

Asia PacificEurope

Latin America

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Global Airline Industry Profit by Region 2012

(million $)

Data source : www.Businessvibes.com

Aviation Industry – Global Scenario

o By 2015, Global Airline Industry would reach $713.6 billion i.e. 42.2% growth from 2010 – States a report by “Marketline”

o MAJOR REGULATORY BODIES GOVERNING THE GLOBAL AVIATION INDUSTRY

IATA – International Aviation Transport Association ICAO – International Civil Aviation OrganizationCANSO - Civil Air Navigation Services Organisation

INDUSTRY FORCESThreat of New Entrants

Power of SuppliersPower of Buyers

Availability of SubstitutesCompetitive Rivalry

OTHER FACTORSLabor

Fuel CostWeatherEconomy

Regulation

Airline Industry Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

Adapted from Competitive Advantage: Creating and Sustaining Superior Performance, copyright 1985 by Michael E. Porter.

-Financial Policy - Accounting -Regulatory Compliance - Legal - Community Affairs

Pilot TrainingSafety Training

Agent Training

In-flight Training

Baggage Tracking System

•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales

•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices

•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition

Information TechnologyCommunications

Product DevelopmentMarket Research

•Lost Baggage Service•Complaint Follow-up

•Baggage System•Flight Connections•Rental Car and Hotel Reservation System

Computer Reservation System, In-flight SystemFlight Scheduling System, Yield Management System

Baggage HandlingTraining

Flight, route andyield analysttraining

Industry Market Forces

Aviation Industry - Indian Scenario

• India is the ninth largest Aviation market in the world

• Indian Aviation industry is growing at a CAGR of 16%

• MAJOR PLAYERS Indigo Spice Jet Jet Airways Air India• BUSIEST AIR TRAFFIC ROUTES Mumbai-Delhi Delhi – Bengaluru

MAJOR MILESTONES IN LAST DECADE2001 Aviation Turbine Fuel (ATF) prices decontrolled 2003 Air Deccan as India’s first LCC 2005 Kingfisher, SpiceJet, Indigo Go Air, Paramount start operations 2007 Industry consolidates; Jet acquired Sahara; Kingfisher acquired Air Deccan 2010 SpiceJet starts international operations 2011 Indigo starts international operations, Kingfisher exits LCC segment 2012 Government allows direct ATF imports, FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration

Forward Thrust

• Open Sky Policy• Deregulation• Modernization of

Airports• Reduction of excise duty

on ATF and abolition of taxes

• FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration

Growth forecast of Air Passengers (in millions)

Industry Analysis – Porter’s 5 Forces Model

Intra-Industry RivalryRivals: Spice Jet, Go Air, Indigo (LCCs)Jet Airways, Air India (Main Airlines)

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Airline Industry Analysis – Indian Market

•Travel Agents •Business Travelers•Federal Government•Pleasure Travelers•Charter Service•Cargo and Mail

•Alternate Travel Services• Fast Trains• Boats

•Private Transportation•Videoconferencing

•Aircraft Manufacturers•Aircraft Leasing Companies – MSD Aviation•Labor Unions•Food Service Companies•Fuel Companies•Airports•Local Transportation Service •Hotels

•Foreign Carriers •Regional Carrier Start ups•Cargo Carrier Business Strategy Change

FACTORS DISCOURAGING INVESTMENT IN INDIAN AVIATION INDUSTRY

Aviation economics are not favourable in India – Higher ATF

Taxes

Inadequate Infrastructure

Poor financial health of most airlines

Highly competitive & Price Sensitive traveller base

FACTORS ENCOURAGING INVESTMENT IN INDIAN AVIATION INDUSTRY

Strong growth prospects

Relatively underpenetrated market

An opportunity to create India as a hub

An opportunity to create India as an MRO centre

Low Valuations

Industry Business Model

Typical Airline Operating Expenses

CARGO V/S PASSENGER

• Function in very different manner

• Core operation procedure differs on fundamental level

• Cargo business is all night affair

• Benefits of operating over night– virtually no traffic while in the air

– The lower level of air congestion allows for less traffic deviations and sequencing into and out of airports

– Also at night, weather is less active and the air is a bit smoother, which pays in spades to making sure flight arrive on time

• More deviations for traffic and weather means burning more fuel and more crew costs for the airline.

• Benefit of the aircraft they fly

– Cargo airlines rarely buy brand new aircraft at full price. Instead, they buy aircraft that have been retired from airline service because of the high hours and cycles

– The cargo industry also enjoys different maintenance requirements than the airlines. Cargo operations have less strict maintenance requirements than the passenger airlines

• Contractual cargo services - These companies have contracts with passenger airlines that allow them to ship items via passenger service

• Untapped Air Cargo Market: Air cargo market has not yet been fully taped in India and is expected that in the coming years large number of players will have dedicated fleets.

CARGO V/S PASSENGER (cont..)

Overview Cost Leadership Strategy

Industry & Market• Growth Trend• Key Segment• Cost & time- driving factors

Indigo’s Arrival & Strategy• Background• Positioning• Key focus areas• Competitive approach • Conclusion

• IndiGo Airlines commenced operations on the 04 of August 2006 with their inaugural flight from Delhi to Imphal.

• Founded by Rahul Bhatia and Rakesh Gangwali, InterGlobe established IndiGo the following year, modelled on US low cost carrier JetBlue and bolstered with an investment from president & CEO Bruce Ashby (a former US Airways EVP).

• Consolidating its position as the fastest growing airline in India with 237 flights ,connecting 25 destinations across the nation, in a short span of almost 5 years

Background

• January 19, 2011 ±India's largest low fare airline, IndiGo, has been granted international traffic rights, by the Government of India, to operate services from several cities in India to Singapore, Bangkok, Dubai and Muscat during the forthcoming summer schedule

• August 12, 2010 Airlines bagged the prestigious Skytrax World Airline Award for being the best low cost airline of India & Central Asia at the World Airline Awards .

• Within 6 years of operation it has captured almost 20% of the market share and is the fastest growing airlines in the domestic market. Indigo has recently captured the no-1 position betting Jet Airways and Kingfisher.

• The aircrafts with all economy 180 seats were onboarded.

Market Share

IndiGo Airlines

• VisionTo become a diversified international corporation in the areas of Air Transport Management, Travel Related Services and Information Technology by delivering outstanding value to our Business Partners, Customers, Employees and Shareholders.

• MissionTo provide our customers with the most inspiring retail and digital environments in the world for books and life-enriching products and experiences.

PESTEL analysisPolitical1. Deregulation of sector2. 100% FDI in Greenfield airports3. 49% FDI in aviation4. Airport infrastructure privatized5. Plan for upgrading non metro airports in next 5 years

Economics1. Rising income of Indians2. GDP growth rate3. Global economic stagnation sees slowing rate of increase in

demand

PESTEL analysis

Technological1. Growth in ecommerce- real time information2. Modernization and privatization of airports3. Development of Greenfield airport with private sector

Social1. Change in the lifestyle has effect on the marketing strategies of

airlines2. Young population with growing income3. Rise in the number of tourist4. Status symbol to travel in planes

PESTEL analysis…

Legal1. FDI limits 2. Airlines merger and acquisition

Environmental1. Sudden and unexpected behavior of atmosphere 2. Shortage of infrastructural capacity

Strength1. Largest low cost carrier2. Consistent profit making3. Reasonable market share4. Brand value in international market5. Good Marketing strategies6. Tie up with hotels7. Good IT in place

Weakness1. Less routes as compared to competitors2. Not yet establish in international

market3. Scope for product differentiation is less4. Not exploring air cargo market

Opportunity1. International routes2. Increasing market share in Indian market3. Chartered flight service4. Development of Airport infrastructure

Threat1. Many competitors in low cost carrier2. Rising Labor cost 3. Changing govt. policies4. Rising fuel price5. Workforce

Tie up with

hotels

Indigo strategy

reduction in training & service

cost

1. Cost leadership strategy

2. Single passenger class

3. Single type of airplane hence reduction in training and service cost

4. No frills such as free food/drinks, lounges

5. Direct sale of ticket is preferred to avoid markup by agents

6. Tie up with hotels

Indigo strategy

Indigo’s Key drivers

Point to Point Model

Single model of aircraft

Operate on secondary

airport

Single class configuration

No In-flight services

Fewer employees per aircraft

E-Ticketing

Benefits

Reduces maintenance and inventory cost

Lower charges, lower turnaround time due to less congestion

Improves aircraft utilization by reducing waiting time at airports

More seats per flight so spread costs over a larger base

Helps to keep the cost and hence the fares low. No frills such as free food/drinks, airport lounges etc.

Reduces employee cost and leads to higher employee productivity

Emphasis on direct sales of ticket through internet to avoid fee and commissions paid to travel agents

Primarily on board Sales. Provide alternate source of revenues – helps to reduce break even PLF.

Cost Leadership Strategy

This strategy is all about gaining competitive advantage over competitors by reducing costs. There are two main ways of achieving this within a Cost Leadership strategy:

♦ Increasing profits by reducing costs considerably, while charging industry-average prices

♦ Volumes – Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you’ve reduced costs

The key ingredients in effective cost leadership strategy are :

♦ Economies of Scale ♦ Access to the capital ♦ Efficient Supply Chain ♦ Superior Management ♦ Use of Technology ♦ A low cost base (labor,

materials, facilities)

Indigo’s Positioning

Price & Product Attributes ±Economy oriented

Customer Service Processes ±On time every time

Strong & Organized Service Distribution & Delivery Systems

Healthy & Luxurious Service Environment

Competent Service Personnel

Expansion strategies

• Increase domestic destination to 50 from the current 25 destinations by 2015.

• Start Air cargo and chartered service by 2015.• Strategic alliance to have footprint in

international market.• Improve IT for better customer service and

increasing efficiency on continuous basis.

The Asia Pacific Region and Singapore Airlines

• The Asia Pacific is an important region in terms of commercial air travel with a steady growth.

• Flag carrier airline of Singapore. • Consistently profitable but experiencing

profit pressures.• Winner of multiple awards for “airline

excellence.”• An extension of the country strategy to be

the business and travel gateway to Southeast Asia.

• An impressive travel infrastructure.• Leader of the Orient Airlines Association

(OAA)

SIA began asMALAYAN

1947

1957

Addition of DC-4SKYMASTER, VICKERS VISCOUNT, Etc

1963

Federation of MalasiaMALASIAN AIRWAYS LTDCame into existence

1966

MALASIAN-SINGAPOREAirline

New look of Airlines With BOEINGS B707s

& B737s

1972

MALASIAN SINGAPORE AIRLINE was split intoSINGAPORE AIRLINES MALASIAN AIRLINES

Inclusion of B747s & B727sDC-10

Singapore airlines

• Mission“Singapore Airlines has a responsibility not only to be an excellent

company, but also to be an excellent citizen of the world by enhancing the lives of the people we touch.”

• Vision“we are a global company dedicated to providing air transportation

services of the highest quality and to earning good returns to shareholder.”

PESTEL analysisPolitical1. Govt. intervention in companies operation2. Extend to which company can allocate finance within

and outside domestic region3. Policies adopted by foreign countries which have an

impact on companies operation4. Favourable tax system.

Economical1. Acquisition beyond boundaries2. Factors like inflation, taxation, economic growth,

exchange rate and inflation 3. Cost of running business is increasing because of the

economical factors

PESTEL analysis cont…

• Social factors1. Customer demands, ability to afford to fly,

attractiveness of being a flight attendant, status, novelty values

2. Maintain trust of the people

• Technological factors1. IT for the benefit of customers2. Productivity suite for the passengers3. Technologically advanced aircraft (longhaul)

PESTEL analysis cont…

• Environmental1. Company need to maintain right

adherence to the environmental concern2. Safe environmental measures

• Legal1. Restriction in flying over or in someone

flying zone2. All essential licenses to fly in a particular

route3. Singapore airlines has flying rights over

major countries 4. Singapore trying to establish in American

continent

In 1993, a total of 1000 airports in 182 countries, 45% of air travellers embarked and disembarked atonly 25 airports in 17 countries.

15 airports in 12 countries accounted for 50 % ofthe total amount of international cargo loaded and unloaded worldwide.

Strength1. Geographical location adv2. Trend setter in industry3. Aircraft with large capacity4. Fuel efficient aircraft 5. Government support, airport6. Lower maintenance cost (new)Premium services, differenciation

Weakness1. Not good at horizontal integration

with a few failed acquisition.2. Considerately high spending on

marketing3. Rely heavily on airline aliances

Opportunities1. Large customer base to exploit in

region2. Increase in demand of trans-pacific

cargo3. Global airlines market4. Middle east, China and India

Threats1. Fuel prices2. Many players changing model to

low cost3. International political environment

Organizational Activity System

Singapore airlines strategy1. Dual strategy (differentiation and cost leadership)2. Excellent service to customers, Business class passengers are

one of the key profit.3. SIA joined with Star Alliance to have a footprint in

international market, tie-up with airlines in Europe and North America, Lufthansa in 1998 – allowed access to Frankfurt and other destinations in Germany and Europe.

4. Strategic alliance with local org in India and China (cargo division, airport services, engineering services and catering)

5. Good IT in place for customer service and increasing efficiency, relatively new fleet of aircraft (less than half of the avg age in industry)

Future scenarios of SIAA : -deregulated, economic condition tough, wait for the better condition as de regulation is best for SIA.-SIA has strong balance sheet, its will survive is better than competitors-After the economy springs, chances of M&A of struggling airlines at best rate

B : Singapore Airlines is in full throttle when the world airline markets are fully deregulated and the economic conditions are good, and SIA is really showing very strong colours indeed

C: Will be stuck in singapore & global expansion will be very difficult-Here the support of the government will be helpful in survival

D : -Reap the profit from increase in customer DemandExpansion very difficult

Suggestions• Establish other HUBS ( but at

present government forbids this)• Alliance (overseas) is a key option

– (Lufthansa to access Frankfurt) • Yield management

– creating a personalize service that differentiate the airlines with its competitor

• Strategic partners• Network optimization

– Asia– china

• M&A

Presently -Equity swaps-Code sharing-Selling seats

Implement-Pool marketing efforts-frequent flyer program-Mutual access to airport capacity

WITH PARTNERSHIP

AIR CHINACHINA EASTERN AIRLINESCHINA SOUTHERN AIRLINES

POTENTIAL NWT TO FIGHT AGAINST DEREGULATION

Airline Alliances• The Star Alliance is the largest of the major groupings.

Consisting of 15 airlines led by United Air Lines and Lufthansa. Star serves about 815 destinations in more than 130 countries.

• Oneworld, which is eclipsed by only Star among the major airline alliances, is led by British and American Airlines. Eight airlines offer service to 550 destinations in more than 130 countries.

• SkyTeam is quickly becoming a major alliance player by serving more than 450 destinations in nearly 100 countries. Led by Air France and Delta, SkyTeam has also consolidated cargo services.

BENEFITS• Economies of scale and specialization• Cross country specialization• First mover advantage and

technological sophistication• Market access• Risk sharing• Branding• Seamless service networks• Cost efficiency• Service improvement• Market power

New Breed of Airline Alliances• Megacarrier Alliances• “LCC” Alliances (P-P now overlapping)• Network Specialist Alliances?• Product Specialist Alliances?• Price Specialist Alliances? • Interactive Marketing Agreements

Airline Alliances• The “Star Alliance” is the largest of the major groupings.

Consisting of 27 airlines led by United Air Lines and Lufthansa. Star serves about 815 destinations in around 194 countries

• “Sky Team” is quickly becoming a major alliance player consisting of 19 airlines by serving more than 1000 destinations in nearly 187 countries. Led by Air France and Delta

• “One world”, which is eclipsed by only Star among the major airline alliances, consisting of 12 airlines is led by British and American Airlines. Eight airlines offer service to 550 destinations in around 47 countries

These three alliances account for more than 60 % of global passenger traffic

Air AsiaVision: To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high faresMission:• To be the best company to work for whereby

employees are treated as part of a big family• Create a globally recognized ASEAN brand• To attain the lowest cost so that everyone

can fly with Air Asia• Maintain the highest quality product,

embracing technology to reduce cost and enhance service levels

• Vision• Mission

Destinations• Established in 1993• Produced profit in 2002• Promotional fare – $ 0.27• Operations:

• 142 routes• 88 destinations

(including subsidiaries)• 400 daily flights

• Hedged 100% of its fuel requirements for the next 3 years

• Subsidiaries:• Air Asia X• Thai Air Asia• Indonesia Air Asia• Air Asia Philippines• Air Asia Japan• Air Asia India (expected in June 2013)

Key Strategies• Partnering with the world’s most renowned

maintenance providers and complying with the world airline operations

• Implementing the regions fastest turnaround time at only 25 minutes, assuring lower costs and higher productivity

• Providing guests with the choice of customizing services without compromising on quality and services

• Making sure that processes are as simple as possible

• Offering a wide and innovative range of distribution channels to make booking and traveling easier

• Applying the point-to-point network keeps operation simple and lower costs.

• Safety First• High Aircraft

Utilization• Low Fare, No Frills• Streamline

Operations• Lean Distribution

System• Point to Point

Network

Business Model (LCC)• Catering on demand for extra payment• Planes with narrow seating and only a single class• No seat assignment• No frequent flyer programmes

• Non-business passengers, especially leisure traffic and price-conscious business passengers

• Short-haul point to point traffic with high frequencies• Aggressive marketing• Secondary airports• Competition with all transport carriers

• Low wages• Low airport fees• Low costs for maintenance, cockpit training and standby

crews due to homogeneous fleet• High resource productivity• Short ground waits due to simple boarding processes• No air freight, no hub services, short cleaning times, and

high percentage of online sales

Strength• Low cost operations• Fewer management level, effective, focused

and aggressive management• Simple proven business model that

consistently delivers that lowest fares• Penetrate and stimulate to potential markets• Multi-skilled staffs means efficient and

incentive workforce• Single type fleet minimize maintenance fee

and easy for pilot dispatch

Weaknesses• Service resource is limited by lower costs• Limited human resources could not handle

irregular situation• Government interference and regulation on

airport deals and passenger compensation• Non-central location of secondary airports• Brand is vital for market position and

developing it is always a challenge• Heavy reliance on outsourcing• New entrants to provide the price-sensitive

services

Opportunities• Long haul flight is a trial to get undeveloped

market share• Differentiation from traditional LCC model by

adding customer services or operation as full service airline with low fare

• On going industry consolidation has opened up prospects for new routes and airport deals

• High fuel prices will squeeze out unprofitable competitors

Threats• Full service airlines start cut costs to compete• Entrance of other LCCs• High fuel price decreases yield• Accident, terrorist attack, and disaster and

affect customer confidence• Aviation regulation and government policy• Increase in operation cost in producing value-

added services• System disruption due to heavily reliance on

online sales

Major Challenges

• Increasing competition because of increasing number of low cost airline competitors, and aggressive competition against the large or traditional airline companies

• Customer decrease because of poor economy

• Rising of the fuel prices• Higher labour cost• Inadequate infrastructure• Route and flight utilization• Safety and security issues of aircraft crash

or being attacked

Air Asia India - Alliance• 2013, 168% y-o-y increase in profits in

comparison to 2012• Despite 1% rise in average fuel price,

airline’s net profit – US$114.08 mn for the quarter ending Dec 2012

• Affected by limited distribution of sales in India & Air Asia

• CEO Tony Fernandes reckons India as “monster of opportunity” with population 50 times that of Malaysia

• Indian Govt. allowed an FDI of 49% in aviation sector

• AirAsia also the first foreign airline to set up a subsidiary in India

• Air Asia seek operations in India with – 49% (Air Asia Stake)– 30% (Tata Sons)– 21% (Amit Bhatia owned Telstra TradePlace)

• The JV mark Tata Sons' return to aviation industry after 60 years

Challenges with Alliance• Air Asia anticipate a bruising

price war• Ensuring the lowest cost in the

business is challenge• Low cost carrier model requires

high operational efficiency• Political challenges pose a major

threat for the deal approval

• Replace A320 by A330 to increase the revenues and efficiencies by 15-20%

Airbus A330– seating capacity 377– Turnaround Time 40 min– Hangar Area 1780 sqft

Airbus A320– seating capacity 180– Turnaround time 25 min– Hangar Area 1320 sqftCost = (40/25 - 1) + (1780/1320 - 1 ) = 0.94Revenue = (377/180 – 1 ) = 1.1Current Fleet size of 120 & ordered 355. Target fleet size of 250-A320 and 150-A330.

• Passenger traffic has grown at a CAGR of 16% over the last decade, although 2.3% of overall decline has been observed after KFA abandonment

• Hub & Spoke Model• Alliance Formation

– Join one amongst the 3 major alliances– OR follow a 3-pronged approach

• A) Develop in its home market ( 6 subsidiaries)• B) Gain foothold in other Asian markets (India & Major). Acquiring Paramount

Airways (1.4%), GoAir (5.25%) with a target of acquiring 20-25% in Indian Airline market

• C) Establish a global presence through marketing alliances with other non-Asian airlines or making share purchases in them.

Future Outlook

Bibliography

• http://civilaviation.nic.in• http://mahdzan.com/papers/sia/SINGAPORE_

AIRLINES.pdf• http://www.zenithresearch.org.in/images/sto

ries/pdf/2011/July/12%20T.Suganthlakshmi.pdf

• http://www.businessteacher.org.uk/free-business-essays/strategic-management-singapore-airlines.php

• Cover story- business today July 11 2010• ATW 34th annual 2008 Airline industry• Article ‘Betting on low’ business today Aug 21

2011

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